Though
leadership of critical energy & infrastructure matters

Issue 174 – April 2018

From the
editor’s desk…

Welcome
to Pipes & Wires #174 which starts and ends with some New Zealand policy
and regulatory decisions. We then look at the increasingly complex area of
regulating emerging technologies, and then look at two related mergers in
Europe. We then contrast some roles of gas-fired generation, and then a look at
substituting wood for coal. So … until next month, happy reading…

Recent client projects

Recent
client projects include…

·Developing a strategy for complying
with the related party transaction provisions.

·Advising on the regulatory implications
of an aging timber transmission pole fleet.

·Facilitating a series of client workshops
to better understand asset information criticality and in-service failure risk.

The
recently elected government indicated that it would review the energy sector,
with a particular emphasis on whether the current electricity market is
delivering fair and equitable prices to end consumers. This article examines
the recently announced terms of reference to set some context for the
conclusions which are expected around April-2019.

Over-arching concerns

An
overarching concern of the government is that electricity prices have increased
faster than inflation for many years. This includes inter alia the following detailed concerns…

·Domestic prices in particular have
increased by about 50% in real terms since 2000, whilst commercial and
industrial prices have remained relatively flat.

·Those domestic prices have grown from a
lower level than other countries scrutinized by the International Energy Agency
(IEA), and have grown at a faster rate.

·That changing technologies provide both
opportunities and challenges, and it is important that the regulatory framework
enables correct adoption of new technologies.

Primary objective of the review

The
primary objective is to ensure that the electricity market delivers efficient,
fair and equitable prices as technology evolves and we transition to a lower
emissions future, taking into consideration environmental sustainability and
security of supply. So … a simple matter of figuring out where we are on the
energy trilemma, where we want (or can afford to be) to be, and how do we get
there.

Key features of the terms of reference

The
review will inter alia…

·Examine whether the prices paid by end
consumers are efficient, fair and equitable. Various perspectives on equitable
are noted, including consideration of the costs being socialised or spread on
different bases.

·Consider the entire electricity supply
chain.

·Evaluate whether the regulatory
frameworks for both competitive and monopoly segments of the supply chain are
delivering efficiency and fairness.

·Consider whether the current market and
regulatory framework will both enable and deliver benefits from emerging
technologies and innovation.

·Consider how new technologies are
likely to effect services, price and different customer groups, and how the
current regulatory framework might promote the benefits of emerging
technologies.

The
TOR specifically excludes matters of technical detail, consideration of the
Input Methodologies, and evaluation of regulatory body’s performance against
their statutory objectives.

Next steps

Pipes
& Wires will examine this review as and when its draft and final
conclusions emerge.

Network access decisions

NZ – the final decision for Powerco’s CPP

Introduction

The
Commerce Commission recently released its final decision on Powerco’s customised price path
(CPP) application. This article follows on from Pipes & Wires #169 and examines the key features of that final
decision.

The Commerce Commission
recently released its final decision on Wellington Electricity’s customised price application (CPP).
This article follow on from Pipes
& Wires #172 and examines
the key features of that decision.

Key features of Wellington
Electricity’s CPP Application include (noting the changes proposed on 16th
February 2018)…

Parameter

Application

Draft Decision

Final Decision

Resilience CapEx and OpEx

$31.24m

$31.24m

$31.2m

Base CapEx for Y3 of CPP

$35.8m

$35.8m

$35.8m

Base OpEx for Y3 of CPP

$33.4m

$33.4m

$30.9m

Revenue for Y1 of CPP

$107.4m

$105.2m

$105.2m

This concludes Pipes &
Wires coverage of this matter.

Regulating emerging technologies

US – requiring competitive purchase of DER’s

Introduction

Regulators seem keen for
regulated suppliers to competitively purchase key inputs to their regulated
pipes & wires businesses. This article examines current regulatory thinking
and then looks at some recent events in California that are requiring electric
companies to competitively purchase DER’s (distributed energy resources).

Current regulatory thinking

Regulators are expressing
increasing concern that key inputs into regulated pipes & wires businesses
could and should be supplied competitively by external suppliers rather than
simply by the regulated supplier themselves, with the most obvious example
being the requirement for design and construction of new assets to be
competitively tendered out. This now seems to be extending to actually
tendering out the ownership of new assets or services that will form an
integrated part of the regulated pipes & wires business.

Recent events in California

Resolution
E-409 by the
California Public
Utilities Commission in
January 2018 requires Pacific
Gas & Electric
(PG&E) to purchase energy storage, demand response or other preferred
resources (eg. solar) rather than having the California ISO allocate “must run” status to 3 of the 4 gas-fired plants
operated by Calpine in the northern California area. The CPUC argued that must run
contracts for the 3 identified gas-fired plants are likely to be more expensive
than DER’s such as solar, batteries and demand response, and in any case the
Cal ISO didn’t follow its own rules for purchasing flexible capacity.

The practical effect of
Resolution E-409 requires PG&E to hold competitive solicitations for energy
storage and preferred resources to meet capacity constraints and voltage
sagging in the 3 specified subareas. The CPUC also notes that a similar resolution
in May 2016
directing Southern
California Edison to
purchase resources resulted in more than 100MW’s of grid-level storage being
installed.

·The article further down this issue of Pipes & Wires #174 on
the battle for gas-fired peaking plants.

US – recovering the cost of EV chargers through regulated tariffs

Introduction

A curious
disconnect seems to be emerging between public policy encouraging the uptake of
EV’s on one hand, and regulatory policy disallowing the recovery of charging
station costs on the other hand. This article examines a recent ruling in the
US state of Missouri that follows on from similar recent rulings in the states
of Michigan and Kansas (refer to Pipes & Wires #157 and #162) that have
made cost recovery uncertain.

Ameren’s proposal to install EV
chargers

Ameren proposed to install EV chargers at 6
locations along I-70 between St Louis and Boonville, along with 1 charging
station in Jefferson City. It was intended that the capital cost of those
chargers would be added to Ameren’s RAB similar to any other regulated asset,
and would hence be recovered through Ameren’s regulated tariffs.

The Missouri PSC’s ruling

As part of
considering Ameren’s rate case, the Missouri Public Service Commissionconcludedinter alia that because the product
being sold is a charging service, not the electricity itself, the PSC does not
have jurisdiction over EV charging stations because they do not fit within the
definition of electric plant in state legislation. It is fundamentally
important to understand that the PSC did not reject Ameren’s rate case, but
rather determined that it had no jurisdiction to determine it. The following
excerpts from media sources expand on this critical issue…

·The board ruled that the
installation and operation of EV charging stations is fundamentally different
from operating an electric utility. That means that although utilities can
enter that business, they cannot do it as regulated monopolies and may not
spread the cost among all of their customers. They would have to operate in the
free marketplace (quoted from MidWest Energy News, 24th April 2017)

·Regulators concluded that if they had jurisdiction over
electric vehicle charging infrastructure, that ruling "would conceivably
assert jurisdiction over other similar battery-charging services, such as smart
phone charging stations or kiosks, RV parks that allow vehicles to connect to
the park’s electricity supply, or airports that connect planes to a hangar’s
electricity supply while parked." (quoted from
Utility Dive, 25th April 2017).

What do we make of this
?

The broad
conclusion above is that while a regulated electric company can provide EV
chargers, it must do so outside of its regulated business meaning that…

·It is free to
set the charging tariff on the basis of a competitive market.

·It cannot add
the cost of the chargers to its regulated asset base and recover the cost
through its regulated tariffs.

So while this
conclusion may well be legally sound, it probably isn’t going to help the
roll-out of EV chargers.

Mergers & acquisitions

Europe – E.On and RWE swap assets to consolidate market positions

Introduction

It’s been a while since Pipes
& Wires examined the German energy sector and its key players, so the
opportunity to write about E.On and RWE reshuffling their assets was too good to miss. This article
examines the proposed reshuffling and the strategies behind it all.

A bit about E.On

E.On has operating subsidiaries
in western Europe, the UK, eastern Europe and
Scandinavia, with annual revenues of about €117b. A key component of E.On’s
recent strategy was the sale of its high-voltage grid Transpower Stromübertragungs
GmbH to Dutch grid operator Tennet.

A bit about RWE

RWE also has operating
subsidiaries across western Europe, eastern Europe,
and the UK with annual revenues of about €51b. RWE has also separated its
high-voltage grid business RWE Trasnportnetz Strom into a subsidiary called Amprion.

·Britain – E.On and Innogy are among the Big Six energy retailers
(about 23% in total).

Pipes & Wires will comment
further as this deal progresses.

UK – merging Npower and SSE’s energy retail businesses

Introduction

The overall structure of the UK
energy sector has been reasonably static for a few years (well … no big
distribution mergers anyway), so news of Npower and Scottish
& Southern Energy’s proposed
retail business merger is exciting. This article examines the early stages of
the proposed merger

The merger partners

The proposed merger partners
are…

·Npower is an electricity generator and electricity and gas
retailer, and is a subsidiary of RWE’s Innogy. The incumbent retail business
were the former Yorkshire
Electricity and Northern Electric businesses.

The combined entity is expected
list on the LSE and be 34% owned by Innogy, with SSE divesting its 66%
shareholding to its shareholders. It will have about a 52% share of the UK
energy retail market (by customer number) and reduce the Big Six to the Big Five
which is of obvious concern to the Competition and Markets Authority (CMA).

The strategy behind the merger

A key component of the strategy
is increasing competition driving the need for improved scale and operating
efficiencies.

Anti-trust concerns

The key concern is obviously
reduced competition, so not surprisingly the CMA intend to take a long, hard
look at this proposed merger. Some salient issues include…

·The most obvious issue being the reduction of the Big Six to the
Big Five, with 1 of the Big Five holding 51% of the retail energy market.

·Various stakeholders have already urged the government to reject
the merger (on the basis of reduced competition, of course), even suggesting
that the Secretary of State for Business should use his statutory authority to
block the merger if the CMA does approve it.

·Arguments from some sectors that allowing a consolidation of
market share would be inconsistent with the Government’s concern over rising
energy prices.

·The recently announced asset swap between E.On and RWE (which
would result in E.On owning a stake in Npower) is likely to complicate this
merger and attract further scrutiny from the CMA.

Next steps

CMA approval of this merger is not
expected until late 2018, although the added complexity of the E.On – RWE asset
swap could delay a decision until mid-2019.

Energy mix & emissions reduction

US – gas-fired peaking v’s gas-fired
moratorium

Introduction

Gas-fired
generation seems to be in an awkward position … somewhere between BANANA (burn
absolutely nothing anywhere near anyone) and “Well it does make less CO2
than coal”. This article examines three different gas-firing decisions
stretching from one side of the United States to the other.

The various decisions

The
various plans are as follows…

·The state of Arizona has placed a moratorium on new gas-fired generation of 150MW
capacity or greater until 1 January 2019 unless very specific conditions are
met (mainly demonstrating that a gas-fired station will have a lower cost than
alternative energy storage options).

It’s
interesting that three regulators have reached different conclusions for three
electric companies, albeit on different sides of the country. Some of the
thinking behind the decisions appears to include…

·The Arizona Corporation Commission’s
recent targets for 80% renewable or nuclear electricity by 2050, along with
3,000MW of energy storage by 2030. Both South Carolina and Louisiana appear to
have significantly lower renewable energy targets.

·New Orleans depends critically on
electrically driven drainage pumps as about 50% of its land area lies below sea
level, and the City’s existing generation plant is aging. It might be concluded
that they are not prepared to rely on wind or solar…

·Low gas prices on the east coast
improve the attractiveness of gas-fired stations.

·Ironically, the ACC has included
nuclear in its’ 80% target, whilst SCE&G cites the high cost of nuclear
(refer to Pipes & Wires #173) as a key reason for proposing
gas-fired plant.

The editor comments

Arizona
certainly does have a hot, dry climate (well, at least on the 2 occasions I’ve
been there) that could lead to the conclusion that solar plus batteries will
suffice. In contrast, Louisiana and South Carolina can have significant variations
in weather including heat, cold and storms that increase demand, increase the
resilience requirements and reduce the likely availability of stored
renewables.

Some
might also observe a collision of renewables with pragmatic security of supply
considerations.

UK – the future for large steam turbine
stations

Introduction

Opinion
on the importance of large, legacy generation plants providing grid security
varies widely, from none at all to vitally important. This article examines
some recent comment from Drax on how important large, legacy generation actually might
be.

A bit about Drax

Drax
began life in 1973 as a 6 x 660MW coal-fired station in North Yorkshire, with a
design coal consumption of about 36,000 tons per day.

Drax biomass firing

Trials
of co-firing with wood around 2004 led to conversion of 3 units to full biomass
firing in 2012, funded in part by various emission reduction subsidies.

The
ultimate plan is to burn about 7,500,000 tons of wood-based fuel in the 3 units,
much of which is expected to be imported from the United States in 50,000 ton
shiploads. To provide some perspective, that is like burning 4 entire Kaingaroa forests every year as well as the fuel (presumably fossil) to load,
ship and handle it all.

So how important might Drax actually be ?

Increasing
penetration of renewables has led to heightened concerns about grid security
and the possible role of thermal generation.

The
important feature of stations like Drax is not that they are large (or legacy),
but rather that they are secure and independent of weather conditions ie. when the Start button is pressed it will start regardless of
how much wind, sun, stored rain or last winter’s snow is available. This
definite start ability alone makes retaining Drax important enough…

The regulatory framework for
the IM’s is set out in Subpart
3 of Part 4 of the Commerce Act 1986. This includes a Purpose Statement at s52R which note the purpose
is to promote certainty, what matters can be covered by the IM (s52T) and the process that the Commission must follow in setting an IM
(s52V).

Key features of the revised draft decision

The Commission has decided to
make a small number of substantive changes to the existing IM which includes
the…

·Incentive regime that applies to Transpower.

·Approval processes for the Base CapEx and Major CapEx.

·Information requirements.

Note that the Draft Decision is
a lengthy and complex document. Effected parties should read the Draft Decision
in its entirety.

Next steps

After a period of consultation
the Commission expects to publish it Final Decision at the end of May 2018.

General stuff

Guide to NZ electricity laws

I’ve
compiled a “wall chart” setting out the relationship between various past and
present electricity Acts, Regulations, Codes etc in
sort of a chronological progression. To request your free copy, pick here. It looks really cool printed in color
as an A2 or A1 size.

A bit of light-hearted humor

What
if price control had been around in the 1920’s and 1930’s ?
A collection of classic historical photo’s with humorous captions looks at some
of the salient features of price control. Pick here to download.

Wanted – old electricity history books

Now
that I seem to have scrounged pretty much every book on the history of
electricity in New Zealand, I’m keen to obtain historical book, journals and
pamphlets from other countries. So if anyone has any unwanted documents, please
email me.

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Disclaimer

These articles
are of a general nature and are not intended as specific legal, consulting or
investment advice, and are correct at the time of writing. In particular Pipes
& Wires may make forward looking or speculative statements, projections or
estimates of such matters as industry structural changes, merger outcomes or
regulatory determinations. These articles also summarise lengthy documents, and it is important that
readers refer to those documents in forming opinions or taking action.

Utility Consultants
Ltd accepts no liability for action or inaction based on the contents of Pipes
& Wires including any loss, damage or exposure to offensive material from
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